Why self-financed upgrade could only happen in NSW

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AFTER the upgrades

A small one-bedroom flat in North Bondi was listed for auction last week, with the vendors hoping for about $800,000 when it goes to auction early next month. 

Nothing very extraordinary in that … except it’s a brand new flat in a very old building, the vendors are the owners corporation and the 36sqm unit with its own courtyard used to be an abandoned storeroom and laundry.

This represents the other side of the “forced sale” legislation that got everyone in a tizz in NSW when it came in about four years ago.

The same laws that allow 75 percent of strata owners to compel the minority of their neighbours to sell the building to a developer, also allows them to redevelop the building, adding floors or new structures on common property, usually to finance the repair and maintenance of an ageing apartment block.

In the case of the North Bondi property, a 1930s block in need of some serious TLC – including to ancient wiring, pre-war plumbing and an asbestos-riddled roof – they made a virtue of necessity, paying for the upgrade by selling and developing common property.

As a result, the owners corporation has two new apartments to sell or let while individual owners bought air space to develop studios and expand their apartments.  The electrics and plumbing have been now upgraded and every new apartment has a balcony or a terrace.

The details of how this came about can be found on the here on the Flat Chat website or the SMH and Age Domain online pages, but it’s only when you look at legislation in other states that you realise what a breakthrough the “redevelopment” aspect of the 2015 NSW Strata Schemes Development Act was.

The two key elements to make this kind of project feasible are the sale of common property and the re-assignation of unit entitlements (so that the new flats pay levies).

Before the NSW law changes, you needed a unanimous vote to sell common property and individuals who simply didn’t want to move – or opportunists holding their neighbours to ransom – could block any such radical changes.

The 2015 NSW legislation was brought in to by-pass hold-outs who were preventing old buildings, well past their use-by dates and increasingly expensive to maintain, from being upgraded or sold to developers.

Now in NSW, you only need the support of 75 per cent of owners by unit entitlements (voting power) as well as by lot numbers.  Then you need planning permission and agreement to change everyone’s unit entitlements.

Strata owners in other states have no such luxury.

In Victoria you still need a unanimous vote in favour of selling common property and in Queensland and South Australia, you need to have no one voting against (a subtle but very significant difference).  Changing unit entitlements is just about as difficult to achieve.

It’s rumoured that Victoria may include some form of renewal regulations in their current review of strata laws.  Queensland’s body corporate laws are already so complicated, you might assume they’d be in no rush to follow suit.

Meanwhile there are at least two other schemes in Sydney’s Eastern Suburbs that are being redeveloped under similar plans. 

But there is still one bug in the sunblock – what about the tax implications of strata schemes selling assets to pay for improvements?

Well, there’s two pieces of bad news – the tax office will want its slice of profits or income and, even worse, they’ll expect you to declare that personally. More on that next time.

A version of this column first appeared in the Australian Financial Review.

One Reply to “Why self-financed upgrade could only happen in NSW”

  1. Avatar Jimmy-T says:

    If you want to start a discussion or ask a question about this, log into the Flat Chat Forum (using the link above). More people will read it there and you can more easily keep track of responses.

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